Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices 37151

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Rule 905 states ‘‘no member or member

organization shall exercise, for any account in

which such member or member organization has an

interest or for the account of any partner, officer,

director or employee thereof or for the account of

any customer, a long position in any option contract

of a class of options dealt in on the Exchange if as

a result thereof such member or member

organization, or partner, officer, director or

employee thereof or customer acting alone or in

concert with others, directly or indirectly has or

will have exercised within any five (5) consecutive

business days aggregate long positions in excess of:

(i) the number of option contracts set forth as the

position limit in Rule 904 in a class of options for

which the underlying security is a stock. * * *’’

4Exchange Act Release No. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998).

5See Exchange Act Release No. 38248 (February

6, 1997), 62 FR 6474 (February 12, 1997) (adopting

Risk Based Haircuts); and Amex Rule 462.

6Exchange Act Rule 13d–1.

7The Commission notes that issuers would, of

course, need to comply with all applicable

provisions of the federal securities laws in

conducting their share repurchase programs.

whether dollar value volume is an

appropriate measure for determining

limited volume; and (3) what conditions

should apply to such an exemption.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18151 Filed 7–8–98; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40159; File No. SR–Amex–

98–22]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the American Stock Exchange, Inc.,

Relating to an Increase in Position and

Exercise Limits for Standardized

Equity Options

July 1, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule

19b–4 thereunder,2 notice is hereby

given that on June 24, 1998, the

American Stock Exchange, Inc.

(‘‘Amex’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II

and III below, which Items have been

prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Amex proposes to amend

Exchange Rule 904 to increase position

and exercise limits for standardized

equity options to three times their

current levels.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization included

statements concerning the purpose of

and basis for the proposed rule change

and discussed any comments it received

on the proposed rule change. The text

of these statements may be examined at

the places specified in Item IV below.

The self-regulatory organization has

prepared summaries, set forth in

sections A, B and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Amex is proposing to increase the

position and exercise limits for equity

options traded on the Exchange to three

times their current levels. Currently,

Amex Rule 904 subjects equity options

to one of the five different position

limits depending on the trading volume

and outstanding shares for the

underlying security. Rule 905

establishes exercise limits for the

corresponding options at the same

levels.3 The limits are: 4,500; 7,500;

10,500; 20,000; and 25,000; contracts on

the same side of the market. Under the

proposed changes the new limits will

be: 13,500; 22,500; 31,500; 60,000; and

75,000. The Exchange believes

sophisticated surveillance techniques at

options exchanges adequately protect

the integrity of the markets for the

options that will be subject to these

increased position and exercise limits.

Manipulation. The Amex believes that

position and exercise limits, at their

current levels, no longer serve their

stated purpose. The Commission has

stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition, such

limits serve to reduce the possibility of

disruption of the options market itself,

especially, illiquid options classes.4

On the twenty-fifth anniversary of

listed options trading, the Exchange

believes that the existing surveillance

procedures and reporting requirements

at options exchanges and clearing firms

that have been developed over the years

are able to properly identify unusual

and illegal trading activity. In addition,

Amex believes that routine oversight

inspections of Amex’s regulatory

programs by the Commission have not

uncovered any material inconsistencies

or shortcomings in the manner in which

the Exchange’s market surveillance is

conducted. These procedures entail a

daily monitoring of market movements

via automated surveillance techniques

to identify unusual activity in both the

options and underlying stock. Further,

the Exchange believes the significant

increases in unhedged options capital

charges resulting from a September 1997

adoption of risk-based haircuts and the

Exchange margin requirements

applicable to these products under

Exchange rules serves as a more

effective protection than position

limits.5

Further, large stock holdings must be

disclosed to the Commission by way of

Schedule 13D or 13G.6 Options

positions are part of any reportable

positions and cannot be legally hidden.

In addition, Exchange Rule 906—which

requires members to file reports with

the Exchange for any customer who

held aggregate long or short positions of

200 or more option contracts of any

single class for the previous day—will

remain unchanged and an important

part of the Exchange’s surveillance

efforts.

Position and exercise limits restrict

legitimate options use. In the

Exchange’s view, equity position limits

prevent large customers like mutual

funds and pension funds from using

options to gain meaningful exposure to

individual stocks, resulting in lost

liquidity in both the options market and

the stock market. The Exchange further

believes that equity position limits also

act as a barrier to the use of options by

corporations wishing to implement

options strategies with their own stock.

For example, existing equity position

limits could restrict the number of put

options that could be sold under a

corporate buyback program.7

Financial requirements. The

Exchange believes that financial

requirements imposed by the Exchange

and by the Commission adequately

address concerns that a member or its

customer may try to maintain an
37152 Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices

8Exchange Act Release No. 39032 (September 9,

1997), 62 FR 48683 (September 16, 1997).

9See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

At 198–91 (Comm. Print 1978).

10Exchange Act Release No. 40087 (June 12,

1998), 63 FR 33746 (June 19, 1998). The NASD’s

position limit filing established position and

exercise limits for conventional equity options

identical to those being proposed by Amex in this

filing.

11Exchange Act Release No. 39032 (September 9,

1997), 62 FR 48683 (September 16, 1997).

12 Id. at 48685. The Commission notes that

approval of the elimination of position and exercise

limits for FLEX equity options was granted for a

two-year pilot period and was based on several

other factors including, in large part, additional

safeguards adopted by the exchanges to allow them

to monitor large options positions.

13 15 U.S.C. 78f(b).

14 15 U.S.C. 78f(b)(5).

inordinately large unhedged position in

an equity option. Current margin, and

risk-based haircut methodologies serve

to limit the size of positions maintained

by any one account by increasing the

margin and/or capital that a member

must maintain for a large position held

by itself or by its customer. It should

also be noted that the Exchange has the

authority under paragraph (d)(2)(K) of

Rule 462 to impose a higher margin

requirement upon member or member

organization when the Exchange

determines a higher requirement is

warranted. In addition, the

Commission’s net capital rule, Rule

15c3–1 under the Exchange Act,

imposes a capital charge on members to

the extent of any margin deficiency

resulting from the higher margin

requirement.

Past increases have had no adverse

consequences. Equity position limits

have been gradually expanded from

1,000 contracts in 1973 to the current

level of 25,000 contracts for the largest

and most active stocks. In 1997, the SEC

approved the elimination of position

and exercise limits in FLEX Equity

options under a two-year pilot

program.8 To date, there have been no

adverse effects on the market as a result

of the past increases in the limits for

equity options or the elimination of

position and exercise limits for FLEX

Equity options.

Changes will allow options exchanges

to compete more fairly with OTC

markets. The Commission has stated

that ‘‘limits must not be established at

levels that are so low as to discourage

participation in the options market by

institutions and other investors with

substantial hedging needs or to prevent

specialists and market-makers from

adequately meeting their obligations to

maintain a fair and orderly market.’’ 9

However, in today’s market, equity

position limits put listed options at a

competitive disadvantage to over-thecounter derivatives. OTC dealers can

execute options trades through overseas

subsidiaries not subject to NASD

regulation, and therefore not subject to

position limits. As a result, the largest

trades can go unobserved and

unmonitored for regulatory and

oversight purposes. Member firms

continue to express concern to the

Exchange that position limits on Amex

products are an impediment to their

business and that they have no choice

but to move their business to off-shore

markets where position limits are not an

issue.

In addition, the Commission has

recently approved the NASD’s proposed

rule change to raise position limits for

conventional equity options (i.e., those

options not issued, or subject to

issuance by the Options Clearing

Corporation) to three times their current

levels (which is the same as three times

the levels established by current

Exchange rules for standardized

options).10

Because conventional options often

have nearly the identical terms as

standardized, Exchange-traded options,

the Exchange believes the position

limits for standardized options should

be at least as high as those for

conventional options. The proposed

rule changes should help to attract

business back to the Exchange where

the trades will be subject to reporting

requirements and surveillance. In its

release approving the elimination of

FLEX equity option limits for a two-year

pilot period, the Commission states that

the elimination of position limits will

allow the listed options markets to

better compete with the OTC market.11

[T]he elimination of position and exercise

limits for FLEX equity options allows the

Exchanges to better compete with the

growing OTC market in customized equity

options, thereby encouraging fair competition

among brokers and exchange markets. The

attributes of the Exchanges’ options markets

versus an OTC market include, but are not

limited to, a centralized market center, an

auction market with posted transparent

market quotations and transaction reporting,

parameters and procedures for clearance and

settlement, and the guarantee of the OCC for

all contracts traded on the Exchanges.12

It should also be noted that individual

stocks are not subject to position limits.

Investors can theoretically hold 100% of

a company’s shares outstanding as long

as they file the appropriate Schedule

13D or 13G. The Exchange believes the

increase in the position and exercise

limits will better enable the Exchange to

complete against the OTC markets and

is an appropriate and responsible

increase given the nature of the

Exchange’s surveillance.

2. Basis

The Exchange believes that the

proposed rule change is consistent with

Section 6(b) 13 of the Act, in general, and

furthers the objectives of Section

6(b)(5),14 in particular, in that it is

designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to foster cooperation and

coordination with persons engaged in

facilitating transactions in securities, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, to protect

investors and the public interest and is

not designed to permit unfair

discrimination between customers,

issuers, brokers, or dealers.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Other

Written comments on the proposed

rule change were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) by order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the
Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices 37153

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Exchange Act Release No. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998) (SR–CBOE–97–

11) (order approving an increase in OEX position

and exercise limits).

4See NYSE Informational Memo Number 96–34

(November 8, 1996).

5See Exchange Act Release No. 34–38248

(February 6, 1997), 62 FR 6474 (February 12, 1997)

(adopting Risk-Based Haircuts); and CBOE Rule

24.11 Margins.

6See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

At 189–91 (Comm. Print 1978).

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the self-regulatory

organization. All submissions should

refer to File No. SR-Amex-98–22 and

should be submitted by July 30, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18147 Filed 7–8–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40158; File No. SR–CBOE–

98–23]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to the Elimination of

Position and Exercise Limits for

Options on Broad-Based Indexes

July 1, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’ or ‘‘Act’’)1 and Rule

19b–4 thereunder,2 notice is hereby

given that on June 11, 1998, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II

and III below, which Items have been

prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to eliminate

position and exercise limits for broadbased index options. The current

reporting procedures, with slight

modifications, which serve to identify

large option holdings and hedging

information, will remain in place.

The text of the proposed rule change

is available at the Office of the

Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization included

statements concerning the purpose of

and basis for the proposed rule change

and discussed any comments it received

on the proposed rule change. The text

of these statements may be examined at

the places specified in Item IV below.

The self-regulatory organization has

prepared summaries, set forth in

sections A, B and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The CBOE is proposing the

elimination of position and exercise

limits for broadbased index options for

the reasons detailed below. The

Exchange will, however, still require

that member organizations file reports

with the Exchange in the event that they

maintain proprietary or customer

positions in excess of Exchange

established reporting thresholds in the

different broad-based index option

products.

Manipulation. The CBOE believes that

position and exercise limits in broadbased index options no longer serve

their stated purpose. The Commission

has stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition such

limits serve to reduce the possibility for

disruption of the options market itself,

especially in illiquid options classes.3

On the fifteenth anniversary of listed

index options trading, the Exchange

believes that the size of the market

underlying broad-based index options is

so large as to dispel any concerns

regarding market manipulation. To date,

there has not been a single disciplinary

action involving manipulation in any

broad-based index product listed on the

Exchange. The Exchange believes that

its fifteen years of experience

conducting surveillance of index

options and program trading activity is

sufficient to identify improper activity.

The CBOE believes that routine

oversight inspections of CBOE’s

regulatory programs by the Commission

have not uncovered any inconsistencies

or shortcomings in the manner in which

index option surveillance is conducted.

These procedures entail a daily

monitoring of market movements via

automated surveillance techniques to

identify unusual activity in both the

options and underlying stock basket

components. Moreover, the CBOE

believes that current NYSE Market on

Open and Market on Close procedures

facilitate the orderly unwinding of large

index program trades.4 Further, the

significant increases in unhedged

options capital charges resulting from

the September 1997 adoption of riskbased haircuts and the high margin

requirements applicable to these

products under Exchange rules serves as

a more effective protection than position

limits ever have or ever could.5

Competition. The Commission has

stated that ‘‘limits must not be

established at levels that are so low as

to discourage participation in the

options market by institutions and other

investors with substantial hedging

needs or to prevent specialists and

market-makers from adequately meeting

their obligations to maintain a fair and

orderly market.’’ 6 However, in today’s

market, the Exchange believes that

position and exercise limits severely

hamper CBOE’s ability to compete with

the OTC and futures markets. Investors

who trade listed options on the CBOE

are placed at a serious disadvantage in

comparison to the OTC market where

index options and other types of index

based derivaties (e.g., forwards and

swaps) are not subject to position and

exercise limits. Member firms continue

to express concern to the Exchange that

position limits on CBOE products are an

impediment to their business and that

they have no choice but to move their